The FDR Framework is the backbone for a 21st century financial system. Under this framework, governments ensure that every market participant has access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to analyze this data because they are responsible for all gains and losses.

Sunday, July 8, 2012

The shredding of the Bank of England's reputation

The Bank of England has a legal monopoly on setting interest rates.

What type of monopolist finds out that someone else is illegally setting interest rates (in this case, the 16 banks that formed an oligopoly to set the Libor interest rate) and then doesn't take action to protect their monopoly?

With that background, the Bank of England's reputation is about to be shredded.

According to a Telegraph article, the Bank of England's Paul Tucker had known for over a year that Libor was being manipulated before he called Barclays' Bob Diamond.

As we know, the result of that conversation was a memo by Mr. Diamond that Barclays' staff took to mean they were suppose to low ball their Libor submissions.

Had the BoE not known that Libor was being manipulated, it could stage a defense based on the notion that it used its regulatory discretion at a time of crisis to stabilize the market. After all, central banks are suppose to set interest rates. [Regular readers know that I think that there is a need for transparency in the financial system so that regulators are never put into a position where they can lie in the name of financial stability.]

However, the BoE knew well in advance of the crisis that Libor was being manipulated.

So much for the regulatory discretion defense or the by law we set interest rate defense (the banks which were manipulating Libor were not suppose to fiddle with the rate by law, hence the illegality of their action even with a 'wink and nod' from the Bank of England).

Labour's John Mann conclusion about Bob Diamond's handling of the Libor manipulation applies equally well to the Bank of England,

either you were complicit, grossly negligent or incompetent.

As I said, if the MPs ask any hard questions, the result is the shredding of the Bank of England's reputation.

Deputy Bank of England governor, Paul Tucker, will be grilled by MPs over the Libor scandal and whether regulators decided to turn a blind eye to misconduct.

The deputy governor of the Bank of England was warned that UK lenders were manipulating interest rates a year before he allegedly gave Barclays “a nod and a wink” to rig its own, in a call with former chief executive Bob Diamond in 2008.

Paul Tucker will on Monday be grilled by MPs on the Treasury Select Committee (TSC) over the Libor scandal, where he will be asked whether regulators decided to turn a blind eye to misconduct during the banking crisis in the interests of financial stability.

Specifically, he is expected to be quizzed about a meeting he chaired of the Bank’s Sterling Money Markets Liaison Group in November 2007, at which several members warned they “thought that Libor fixings had been lower than actual traded inter-bank rates through the period of stress”.

Mr Tucker will also be asked to explain why he did not want to relay a message from Barclays’ chief executive Bob Diamond to Westminster that other banks were low-balling their Libor submissions on Oct 29, 2008, according to Mr Diamond’s record of the event.

TSC sources yesterday said Mr Tucker must have known that Royal Bank of Scotland and Lloyds Banking Group were posting false rates because their Libor submissions were lower than Barclays even after they had been locked out of markets and forced to take £60bn in secret loans from the Bank.

Andrew Tyrie, the TSC chairman, has described the note of the conversation between Mr Tucker and Mr Diamond as “a nod and a wink” for Barclays to rig their Libor rate.

“The question will be whether Mr Tucker knew Libor was being manipulated and whether he was allowing it for the sake of market confidence,” one source said.

He will also be asked to clear up speculation about whether Baroness Vadera and Cabinet Secretary Sir Jeremy Heywood were preparing to nationalise Barclays in 2008 or encouraging banks to lower Libor submissions.

The exchange between Mr Tucker and Mr Diamond in October has become a central issue in the scandal, raising questions about the role of regulators and politicians in so-called low-balling.

About this blog

A blog on all things about Wall Street, global finance and any attempt to regulate it. In short, the future of banking and the global financial system.

This blog will be used to discuss and debate issues not just for specialists, but for anyone who cares about creating good policies in these areas.

At the heart of this blog is the FDR Framework which uses 21st century information technology to combine a philosophy of disclosure with the practice of caveat emptor (buyer beware).

Under the FDR Framework, governments are responsible for ensuring that all market participants have access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to use this data because under caveat emptor they are responsible for all gains and losses on their investments; in short, Trust but Verify.

This blog uses the FDR Framework to explain the cause of the financial crisis and to evaluate financial reforms like the ABS Data Warehouse.